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Sandy: insurance coverage for losses

With none of the romance of Bruce Springsteen's epic song "4th of July, Asbury Park (Sandy)," the fireworks indeed were "hailin' over Little Eden" on October 29-30. Superstorm Sandy's driving winds and rain have caused enormous losses to businesses throughout the Mid-Atlantic region, and particularly in New York and New Jersey. Affected businesses will now turn to their insurers, and the question is, how much of those losses will be covered? Early estimates are that covered losses may exceed $5 billion, making Sandy one of the most costly storms in U.S. history.

For the thousands of businesses affected by Sandy, carefully reviewing your insurance policies and taking steps to perfect your coverage claim, promptly, will help maximize your insurance recovery. The key steps all affected business should take, beginning immediately, are:

1. Evaluate your coverage.

Businesses should review their first-party property coverage, which protects against property (real and personal) losses and, depending on the coverage purchased, lost income and more.

A key question will be whether, and to what extent, there is coverage for losses caused by flooding. Unlike the homeowners' policies that were the focus of most of the attention following Hurricane Katrina, most business policies do cover flood losses, although often with lower limits. Following Hurricanes Katrina and Irene, many businesses (and individuals) bought separate flood coverage or increased the limits of existing flood coverage. Businesses should carefully evaluate their specific policy language and the governing case law concerning flood coverage. Even if the coverage for flood-related damage is questionable, certain damages may be covered if caused in part, for example, by wind.

Policyholders should be aware that deductibles often are much higher for hurricane coverage than for storm coverage. For hurricanes, the deductible often is calculated as a percentage of loss (up to 5%), whereas the deductible otherwise is a fixed amount. The insurance commissioners of at least New York and Connecticut have announced that insurers should not impose the hurricane deductible, as Sandy had been downgraded by the time it made landfall. Policyholders in New Jersey and other affected states should monitor this in their states, but in any event should contest any effort by their insurers to impose higher hurricane deductibles.

It also is important to assess whether the policies provide coverage for lost business income, whether due to damage to your own property, nearby property damage having effectively prevented access to your business, or a governmental authority having blocked access to your property. Many policies also cover the extra expenses you incur to protect your property and mitigate against further damages.

2. Provide prompt notice to your insurer(s).

Policies require that notice of loss be provided "promptly," "as soon as practicable," or the like. Policyholders should give notice to all insurers as soon as possible. If you have any doubt as to whether to provide notice, you probably should provide it. Some courts have held that failure to give prompt notice can foreclose any insurance recovery. If you have any concerns about whether to give notice, you should seek counsel so that, if notice is given, it is given timely.

Insurance policies generally state how and to whom notice must be given. You should follow the policy provisions precisely. For example, unless expressly authorized by a policy, notice to your broker is not notice to the insurer.

The generally is sufficient for the initial notice to state that you have suffered covered losses as a result of Sandy, describe generally the sorts of losses you have suffered (e.g., damage to real and personal property, loss of business income, and extra costs to prevent further damage), and specify the location(s) of damage. Some policies, however, have more specific requirements regarding the giving and contents of notice, so again, review the policies carefully. The policies set out a later deadline for providing the detailed proof of loss (discussed below).

In providing notice, as in all other matters involving insurance claims, wording can make a difference. Claims are governed by policy language; you should be aware of policy exclusions and avoid using language that may implicate an exclusion. Insurers may attempt to use a company's words against it in seeking to stretch the boundaries of an exclusion, even where the facts do not justify application of the exclusion.

3. Document losses and preserve records.

To maximize your insurance recovery, you will need to document the full amount of your losses. You should start by taking pictures, or even videos, of the property, capturing the conditions and all damage from all angles as soon as possible after the storm. Leave no picture untaken. If access to your business is hindered by an external cause - a roadblock or problems with another building - photograph that too.

You should establish the pre-storm value and condition of your property, as well as the cost of repairs needed to restore your property to its pre-storm condition. If property is damaged beyond repair, you should demonstrate the need for and cost of replacement. It is especially helpful to have pre-Sandy pictures of your property and an inventory of all real and personal property; if you do not have a complete pre-storm inventory, promptly prepare an inventory of all damaged property.

You also will need to demonstrate your loss of business income. The form of this proof will vary depending on your business but may include, for example, reservations or orders that were booked but could not be filled due to Sandy or prior financials that are indicative of the business levels you would have had but for the storm. If your supply chain was interrupted, you should be prepared to document any increased costs incurred to obtain alternative sourcing or the unavailability of reasonable alternative sourcing.

4. Minimizing damages and the insurer's right to investigate.

You must take reasonable steps to mitigate, or prevent, any further damage from occurring. This may include such steps as temporarily patching a roof or drying the facility to prevent rot and mold.

In response to the notice of loss, your insurers likely will exercise their right to inspect the site. It is preferable to allow the insurance inspection before performing remaining repairs, apart from the measures you must take to prevent additional damage.

Insurance policies require that you cooperate with the insurer in its investigation of the claim. You should expect many questions and demands for documentation. In doing so, you again need to be mindful of policy language, as the insurers will often be searching for bases to limit or even exclude coverage. It is best practice to demand that the insurer's questions be written and to respond in kind. Indeed, even if the insurer insists on oral questions, you should provide answers in writing to the extent practical.

5. Comply with policy time limits and other policy provisions.

Your policy likely provides that a detailed proof of loss must be submitted within a specified time period. The policy also may require filing suit within a prescribed period, and the time limits often are short. Although it is arguable that a contractual time limit for filing suit is not enforceable in certain situations, the safer course is to enter into a written agreement with the insurers to extend any such time limits.

6. Proof of loss.

The claim ultimately is detailed through a formal proof of loss. Great care should be taken in preparing the proof of loss. The better substantiated your proof of loss, the more likely you are to obtain a favorable nonlitigated resolution. But if litigation proves necessary, whether in court or through a nonjudicial valuation procedure dictated by the policy, a well-supported proof of loss is critical to a policyholder's success.

Superstorm Sandy has caused tremendous damage to many businesses, and the losses continue to mount. Businesses pay substantial premiums to insure against the chance that something like this will happen. Now, it has happened. It is time to hold your insurers accountable for the coverage promises they made when they took your premiums. Following the above steps is a good place to start.

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